Parental aid

Offering financial support, guidance to college-bound kids

RayMartin

BOSTON (CBS.MW) -- Parents regularly wrestle with how much money they should give their children when they're off at college. The right answer depends on each family's values and financial ability.

There's a lot to consider in the message the level of aid sends. This is a time to help students learn about money and develop the basic financial-planning skills they'll use for a lifetime. It's worth the effort to weigh this one carefully.

Most parents pay whatever they can afford for their child's immediate education expenses. Paying for entertainment expenses is another matter.

Clearly, parents with excess wealth can provide for all their child wants. If that's their desire, I advise that they teach their children to respect wealth, how to manage it, the responsibility that comes with it and to respect those who do not have it.

When well-moneyed parents give their child a new car, a wad of cash and a credit card and send them off to college, while well intentioned, this does nothing to teach their student about managing money. This only teaches them to spend money, often to impress their friends or to gain popularity. This often is the cause of bigger money problems later in life.

Parents of modest finances can make different mistakes. If they deplete their savings, borrow from retirement plans, tap out their home equity, or never save for their own retirement to pay for school expenses, they can create financial problems that will impact the parent and the child.

While it's noble to sacrifice so the child has an opportunity for self-improvement, parents need to remind themselves why the airlines tell passengers to put on their oxygen mask before assisting their children -- parents' ability to help their children is impaired when their own well being is at risk.

It's important to remember that while it sounds nice for your children to have no college loans, they have a lifetime of earnings ahead of them, while parents do not.

Whatever parents' view on providing financial support, there is a recurring theme -- parents who teach their children the value of money and how to manage spending before they head off to school develop students who're less likely to get into financial difficulty.

Not just a job -- it's money boot camp

The best way to teach kids about money is to make them work a summer job, through late high school and college years. Managing your spending and money is a contact sport -- you learn by doing. Even if they don't need the money, parents should have their kids work summer jobs for a few years before they leave home to teach them about tax withholding allowances, the W-4 worksheet, FICA tax and depositing paychecks. They'll also learn about spending money and preparing their tax return, all activities that help them learn about basic money management. In short, having a job and earning money forces you to interact with money, the financial system and basic financial products.

Planning for education extras

In addition to tuition, room and board, going off to school comes with a lot of extra expenses, including books, a computer and printer, additional meals, laundry, cell phone, travel home, entertainment and sports fees. There are also unanticipated costs such as a refrigerator, microwave oven, furniture and the inevitable car repair, parking tickets or trip to the infirmary or ER.

Most students need to stash $2,000 to $5,000 in cash to get through the school year. Parents should work up a college spending plan with their children, listing each category of expenses and targeting a total amount they'll need for the year.

A jungle without a guide

Students will be tempted to experiment with a lot of things while away at school. In their first semester of college, students are offered an average of eight credit cards. Many of these offers are made on campus, through targeted marketing campaigns that offer free gifts. Credit card issuers get the list of student names and the use of college logos in exchange for sharing a slice of the fees from students' use of credit.

The challenge is that most high schools and colleges do not provide students with courses on how to use the financial tools they'll need for basic money management. And while there are schools where these classes are available, they are electives, not requirements.

Here's my guide to the financial tools and decisions that face students and their parents:

Checking account

Even if they never write a check, students will need a checking account. That's because these accounts provide for daily withdrawal demand from ATMs and by debit card. The most frequent student transaction will be using a debit card and hitting up the ATM for cash. Look for an account at the college credit union or local bank to avoid the $1 to $3 transaction fees for using out-of-network ATMs. Title the account in the student's name with a POD to the parents -- POD means "payable on death." Avoid the overdraft credit, which only encourages spending money that isn't there and is sure to rack up more fees when used. Parents who want to monitor spending can set up on-line access to the student's account and also request to receive duplicate statements. With Web access, parents can even transfer money on-line on a scheduled basis or as needed.

Student ID

At many colleges, the school-issued ID card doubles as a smart card, which can be used for prepaid expenses such as meal plans and can also be linked to a local bank account and used as an ATM/debit card. Students should keep the student ID separate from their bank account for two reasons: this keeps expenses covered by parents separate from other spending money and avoids losing access to the bank account if the student ID is lost or stolen.

Credit cards

These are inevitable -- 54 percent of college freshmen get one. This rises to over 92 percent for students in their sophomore year. The main reason students give for applying for and using credit cards is a good one: to establish and build their credit. What they need to know is that this can backfire as too many credit cards and late payments can create a poor credit rating. This may not seem like a big deal until they get turned down for a car or home loan or, even worse, a job. Many employers check credit reports and turn down applicants who have poor credit ratings.

Because they are of legal age (18 in most states) students can apply for credit cards without parental permission or knowledge. Parents need to have a long discussion about the perils of credit card misuse and work on how they will handle the inevitable "financial emergencies."

Parents should avoid signing jointly with their student on credit cards -- this is an invitation to credit problems and identity theft when a student's wallet or purse is lost or stolen. Instead, set up a card with daily and lifetime limits for transactions. Parents who want to monitor their student's use of credit can receive duplicate statements or set up on-line access to view the account activity. Parents like this because they can see where the money is going.

Health Care Proxy and Living Will

Parents should consider having their student complete a Health Care Proxy and Living Will. These advance directives help to avoid making difficult decisions under duress, and hopefully will never be used. Although anyone can do this for himself, parents should arrange a meeting with their child and an attorney to do this. Also, students with assets should think about either jointly titling assets with their parents or getting a will.

Health insurance

Health plan coverage typically covers dependent students while they attend school full time, up to age 25. Parents and students need to inquire how the student's medical coverage applies when away at school or abroad. They also need to know how they are covered when using the college infirmary or out-of-network medical service providers. Co-payments and out-of-pocket costs will continue to be eligible for reimbursement from flexible spending plans.

Calling home

Prepaid phone cards that offer 5-cents-a-minute rates are a good idea for budget-minded students and their parents. Also consider a cell phone plan with large buckets of minutes for evening and weekend use. These provide virtually unlimited use and lower costs when use is restricted to these times.

Road trip

When a student is taking a car off to school, parents should transfer the title to the student's name, requiring her to register and insure it on her own. This protects the parent from liability and is also educational for the student. It's also a great idea to require the student to take two courses -- basic auto maintenance and driver's education. These can pay for themselves many times over by avoiding common repair scams and reducing insurance premiums.

Using basic financial tools and money management should be learned by students well before they go off to school. It can make all the difference and be a good experience for students and parents.

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